Euro Leveraged Loans Still Lack Non-Bank Buyers

While institutional investors this year have scooped up nearly 42% of leverage buyout loans in the U.S. worth $100 million or more, the LBO loan market in Europe - though blooming - continues to be largely driven by bank investors.

According to a recent study from Portfolio Management Data, institutional buyers accounted for just one-quarter of the investors in European LBO loans. What's perhaps more surprising, however, is that not one of those investors hails from Europe.

"There isn't an established institutional investor market over there," says Tom Newberry, senior vice president of bank debt capital markets at Donaldson, Lufkin & Jenrette. "Over the next few months we'll see more players, [but] it will take years."

A big part of the reason for this trend is the fact that institutional players overseas have no experience with, and only limited knowledge of, bank loans as an asset class. Prior to the euro, most portfolio managers in Europe made their money via currency arbitrage, so it's only recently that they've been looking at corporate credit risk.

"European institutional investors are not that educated or courted," explains Michael Clark, managing director of loan syndications for Europe at ING Barings London.

However, at least for now, the lack of institutional buyers in Europe doesn't seem to be a real concern. Market players noted that the banks overseas have been more than willing to participate in LBO loans, as shown by the success of deals like last month's 6.6 billion euro credit facility for Olivetti SpA. That deal attracted a total of 78 lenders - in addition to the four lead arrangers - yet just one institutional investor, Met Life Investments, represented in the group.

"In Europe, syndicated loans are structured for the bank market," said ING Barings' Clark.

Another reason for the absence of institutional players is the relatively small size of Europe's LBO loans, compared with U.S. transactions. According to PMD, during the first six months of this year there were 51 such deals greater than $250 million in the U.S., while Europe saw less than half that number. Even expanding the data to include all leveraged loans completed during the first half of 1999, the number of U.S. deals worth $250 million or more eclipsed European ones by a margin of 177 to 26.

"There hasn't been a lot of [leveraged buyout loan] products," says Payson Swaffield, portfolio manager at Eaton Vance, which invests heavily in bank loans. "We need more products to determine our appetite."

Considering that the high-yield bond market has only recently come into its own in Europe, it could be some time before an institutional buyer base develops overseas. That was certainly a gradual process in the U.S. loan market, as it took five years for the number of institutional investors to grow to 122 from 14.

Yet the hope is that a single currency will fuel even more mergers and acquisitions overseas, and thus leveraged loans. Already this year Europe has spawned some the biggest syndicated financings, such as deals for Olivetti, Vodafone Group PLC and Repsol SA, all of which were used to fund mergers and acquisitions. Most recently, L'Air Liquide SA and Elf Aquitaine SA have both gone to the bank loan market to fund multi-billion-dollar purchases.

With all these factors in mind, market players said the question is not if institutional investors will ever become important players in the European syndicated loan market, but rather when.

- Naruth Phadungchai